Introduction
Mutual funds are one of the most preferred investment tools in India. One of their prominent advantages is liquidity. As an investor, you can easily convert your funds into cash to fulfil various financial needs. This is where mutual fund redemption comes in. Let’s dive into mutual fund redemption - meaning and process.
What is redemption in mutual funds?
Mutual fund redemption is the process of exiting from a mutual fund scheme completely or partially. In other words, it is when you decide to take your money out of the scheme by selling a few or all the fund units and converting them into cash. The redemption value depends on the Net Asset Value (NAV) of the fund unit prevailing at the time of redemption. Any applicable fees and taxes may further impact the final amount you receive.
For example, you purchase 15000 units at an NAV of INR 5 in a mutual fund scheme. The NAV rises to INR 9 over time. You decide to partially exit from the scheme by redeeming 5000 units. The redemption value, in this case, will be INR 45,000. The redemption value will be INR 1.35 lakh if you decide to completely exit from the scheme by redeeming all the units.
Several reasons may compel you to redeem your fund units. It may be a financial emergency, consistent underperformance of the fund, change in your investment strategy or fulfilment of your financial goals.
Types of mutual fund redemption
Now that you know what is redeem in mutual funds, here are the three types of mutual fund redemption:
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Unit-based redemption
In this type of mutual fund redemption, you can mention the number of units you want to redeem from your mutual fund investment. The redemption value is based on the prevailing NAV of the fund unit and the number of units redeemed.
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Amount-based redemption
In this type of mutual fund redemption, you can mention the amount you wish to redeem from your mutual fund investment. The mutual fund house will redeem units equivalent to the mentioned sum.
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Full redemption
In this type of mutual fund redemption, you decide to redeem all the units and exit from a mutual fund scheme completely. The redemption value depends on the NAV of the unit on the date of redemption.
Charges involved in mutual fund redemption
Redeeming your mutual fund units may involve certain charges known as the exit load. This is a fee charged by a mutual fund house when you redeem units before a specific period ends. It is charged to discourage short-term trading. Exit load may vary between mutual fund schemes and generally is a percentage of the redeemed amount.
Ways of mutual fund redemption
Redeeming mutual funds is a simple and hassle-free process. Here are the ways through which you can redeem your fund units:
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Trading or demat account
This method comes into the picture when you have purchased mutual funds using a trading or Demat account. You need to place a sell order using the same account and broker. An electronic payment through NEFT or IMPS will be made against your redemption request. You will receive the cash value in the bank account registered with the Demat account.
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Asset Management Company (AMC) or distributors
This method is used when you have purchased mutual funds directly from an AMC or a distributor. You can redeem your funds online through the company’s online portal. You can also visit the AMC office if you wish to opt for the offline mode. You will receive the cash value once the redemption process is complete.
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Registrar or Transfer Agencies (RTAs)
Mutual fund redemption can also be done through RTAs. These agencies maintain records for mutual fund houses and allow you to redeem your investments through them.
Wrapping Up
Mutual fund redemption is a simple process. However, it is crucial to consider redemption charges before exiting from a mutual fund scheme. Also, you may make taxable capital gains on selling the units. The tax liability depends on how long you hold the investment and the type of fund. So, make sure you consider all expenses related to mutual fund redemption and make an informed and profitable decision.
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